CHAPTER IV

OUTLINE OF TRUST TAXATION AND WAYS BY WHICH TRUSTEES MAY MINIMIZE TAXES

31. Different kinds of trusts from a taxable point of view

The transferring and vesting of property in one person, called a trustee, to be managed and disposed of by him for the benefit of one or more other persons, called beneficiaries or cestuis que trust, constitutes our system of trusts. "A trust is a right of property, real or personal, held by one party for the benefit of another." It implies two interests, one legal and the other equitable; the trustee holding the legal title or interest, and the beneficiary or cestui que trust holding the equitable title or interest. The legal title carries with it the right to the possession and control of the property; the beneficial title carries with it the right to the ultimate enjoyment of the property. The trust was invented and developed in the English Courts of Chancery and comes to the United States as a part of our heritage of English jurisprudence, modified, changed, or limited in certain states by statutory provisions, and absent from the laws of Louisiana because that state derives the basis of its legal system from the Roman law. An eminent legal author has said: "The system of trusts is now so thoroughly recognized that, according to the laws of property in England, and in other countries where the English common law is in force, it is one of the rights of ownership that this division of the complete title should take place.

1 Bispham's Principles of Equity (6th Ed.) § 49.

If the absolute owner of the property wishes for any reason to have the equitable title only vested in him and the legal title outstanding in another, he has a perfect right to hold and enjoy his property in that way. Nor is it necessary that the cestui que trust should be under any disability in order that he may enjoy this privilege. A person sui juris, and who is absolute owner of property, may avail himself of the system of trusts, and may keep the legal title outstanding in another as long as he sees fit so to do."

Trusts are created under wills, by deeds, declarations and agreements. No grant, franchise, or charter being sought, there has been no occasion for the imposition of any form of organization tax. Increase in the use of trusts for the carrying on of business, however, has resulted in recent development of some legislation and tax rulings tending towards, if not actually imposing, taxes on trusts in business not imposed upon other forms of trusts. Solely for the purpose of convenience in discussing special or additional forms of taxes sometimes imposed because of the form of the trust, it seems convenient for purposes of this chapter to make distinction between trusts under which the interests of the beneficiaries are evidenced solely by the will, deed, declaration, or agreement, and trusts in which the interests of the beneficiaries are additionally evidenced by transferable certificates.

32. Theory of trust taxation in general-Distinction between different kinds of trusts

In a trust there is a legal interest and its dependency, an equitable interest, which together form really but one entire interest in a property. They are not two distinct properties, and hence, in general theory, taxation of property is not increased, decreased, or in any way affected by the fact that a

trust is created. It has been the generally accepted method of trust taxation, to disregard the fact of trusteeship, except to reach the property, either through the trustee or the beneficiary, and in effect, to levy no other or further tax, because a trust relation has been created. But with the development and extension in use of voting trusts and trusts in general business with transferable shares, variously known as "business trusts," "trust estates as business companies,” “Massachusetts trusts," "common-law companies," etc., certain forms of corporate taxes have been levied or attempted to be levied against the trusts classified in this discussion as "trusts with transferable certificates."

33. Taxation of trusts without transferable certificates-General property taxes

Usually taxes are listed or assessed against property held in trust against the trustee the same as if he were the real owner in every respect. Statutes of the various states and their application by court decisions and rulings of tax officials fix the practice in each taxing jurisdiction, varying in detail, but all accomplishing the same substantial result of but one tax, and that tax the same, as if no separation of ownership into legal and equitable had been accomplished. Difficulty sometimes arises and divergence in practice exists in the case of a resident trustee of personal property for a nonresident beneficiary and in the case of a resident beneficiary and a nonresident trustee. These are matters requiring investigation of the laws of the state where a trustee resides, holds property in trust, or does business as a trustee, and of the laws where the beneficiary of the trust resides. A brief survey of the situation is included in the synopsis of the tax laws of each state in Part II of this book. It is the general aim of statutory provision

and construction thereof, to avoid a result of double or additional taxation because of trust ownership and divergence in residence of the owners of the legal and equitable interest. Courts frequently favor this result, even where taxes are entirely escaped by the appointment of nonresident trustees. 34. Taxation of ordinary trusts, i. e., without transferable certificates-Income taxes

Income from property held in trust is taxed to the individual beneficiaries or against accumulated income in the trust estate, treated as a unit; that is to say, the same as if the trust were a single individual. The rates are the same as if the income accrued or was paid to partner, instead of the beneficiary or cestui que trust. Under the federal income tax law trustees are required to make (1) a return of income, or (2) a return of information, according to whether the income by the terms of the trust is held for future distribution or whether the income is to be distributed to the beneficiaries, whether or not at regular intervals. When the income is to be retained by the terms of the trust for future distribution the trustees make return and pay the tax on the trust as a unit. In such cases the trust is allowed an exemption of $1,000, and surtax rates are applied the same as if the trust were an individual person. On the other hand, when the income is distributed or distributable, each beneficiary includes the income apportioned to him whether actually received or not, and pays taxes or not, according to the amount of his total net income as thus increased."

2 Anthony v. Caswell, 15 R. I. 159, 1 Atl. 290 (1885); Lowry v. Los Angeles County, 38 Cal. App. 158, 175 Pac. 702 (1918).

› Paragraph 879, Corp. Trust Co. Income Tax Service, 1922.

35. Taxation of trusts with transferable certificates -General property taxes

Taxes on real estate are practically against the real estate itself. So it makes no difference whether the owner is an individual, corporation, trustee of an ordinary trust, or trustee of a trust issuing transferable certificates. Treating the legal and equitable title as one for purposes of taxation, and avoiding double taxation of personal property, even when the 'trustee and beneficiary reside in different jurisdictions has been discussed in the preceding section. Here it is additionally necessary to consider whether this situation is altered, where trustees issue certificates or transferable shares to beneficiaries. That there is no new right or privilege subject to tax merely because such certificates are issued, and that the division of title into legal and equitable interest is but the exercise of a common-law right, is pointed out in an early New Hampshire decision, wherein the court says: "When an owner has left his farm in trust for his widow and children, and the trustee, holding the legal title without any beneficial interest, pays the farm tax and expenses out of the farm income, and pays the rest of the income to the widow and children, a second tax for the same amount is not assessed on the equitable title of the widow and children. For the purpose of taxation, the legal title of the trustee and the equitable title of the widow and children are not more than the whole title, legal and equitable, which the testator had in his lifetime. And if the testator, dividing the equitable title and beneficial interest into four shares, gave two shares to his widow, and one share to each of his two children, directed the trustees to issue to them certificates as evidence of their respec

4 Morrison v. Manchester, 58 N. H. 538, 563 (1879). See section 126, Sears, Trust Estates as Business Companies (2d Ed.).